George Bush's growing vulnerability to the performance of the US economy was highlighted yesterday when government unemployment data showed America in the grips of a jobless recovery last month.

With Democrat challengers growing increasingly optimistic about a challenge for the presidency next year, figures from the department of labour revealed that payrolls fell by almost 100,000 in August - the seventh consecutive monthly fall.

The weak performance of the jobs market came as a shock to Wall Street, which had been expecting employment to pick up in response to signs that the economy may be emerging from its three-year downturn.

Stronger manufacturing order books and robust consumer spending had left analysts confident that the US would start to generate more employment. But they warned that the haemorrhaging of jobs in the US coupled with the security crisis in post-conflict Iraq raised the possibility that Mr Bush would face the same electoral problems as his father, who lost control of the White House in 1992 despite victory in the first Gulf war.

Payrolls fell by 93,000 last month, compared to a revised fall of 49,000 in July, with jobs lost in both the manufacturing and services sectors. However, the unemployment rate fell 0.1% to 6.1%.

Michael Woolfolk, currency analyst at the Bank of New York, said: "This is a negative number and confirms the jobless recovery is still a viable explanation for what is happening right now. Growth is coming without a follow through in employment which is a concern for Bush's hopes for re-election next year. This is going to fuel talk by Bush's opponents of a jobless recovery."

Although share prices barely reacted to the news, the dollar fell sharply on the foreign exchanges, losing ground against both the euro and the pound.

Chris Low, chief economist at FTN financial in New York, said: "We didn't see any improvement in any of the employment statistics this month - all of them looked really ugly and now we have confirmation of that ugliness.

"This shows we will have stronger demand gaining momentum as the quarter goes forward but manufacturers clearly don't believe it's going to last and they're not adding any more employees.

"I suspect this is going to end with job growth at some point but it is truly frustrating, and the worst part of it is that yesterday's unemployment claims mean it could carry into September as well."

Paul Ashworth, analyst at Capital Economics, said: "Firms are continuing to meet stronger demand by boosting productivity rather than taking on extra workers. This should be good for corporate profits in the short term, but how long can consumer spending continue to drive the economy forward while employment is contracting at this sort of rate?"